SEC Review of Executive Compensation Disclosure

In October, the SEC’s Division of Corporation Finance completed its initial review of the executive compensation and related disclosure of 350 public companies under the SEC’s new and revised rules relating to executive compensation disclosure. Two principal themes emerged from the SEC’s review of these companies.

1. Better Analysis

First, the Compensation Discussion and Analysis needs to be focused on how and why a company arrives at specific executive compensation decisions and policies. This does not mean that disclosure needs to be longer or more technical; rather, disclosure should be crisper and clearer. The focus should be on helping the reader understand the basis and the context for granting different types and amounts of executive compensation.

2. Clearer Presentation

Second, the manner of presentation matters — in particular, using plain English and organizing tabular and graphical information in a way that helps the reader understand a company’s disclosure. The executive compensation rules require companies to disclose a great deal of information. Techniques such as providing an executive summary, or creating tables or charts tailored to a company’s particular executive compensation program, can make the disclosure more useful and meaningful. The SEC encourages companies to continue thinking about how executive compensation information — from the big picture to the details — can be better organized and presented for both the lay reader and the professional.


The SEC’s new and revised rules relating to executive compensation disclosure became effective on November 7, 2006. These rules have significantly changed the disclosure a public company provides about how it compensates its most highly paid executive officers, including its principal executive officer and its principal financial officer, and its directors. On December 22, 2006, the SEC further amended the disclosure requirements for executive and director compensation with respect to how a public company discloses stock and option award compensation. The revised rules also update and clarify the related person transaction disclosure requirements and consolidate and add corporate governance disclosure requirements.

In 2007, the SEC undertook a project to review the executive compensation and other related disclosure of 350 public companies to evaluate compliance with the revised rules and provide guidance on how those companies could improve their disclosure. In identifying 350 companies for review, the SEC sought to cover a broad range of industries.

What follows is a summary of the SEC’s recommendations for improving executive compensation disclosure.


    • Manner of Presentation

The SEC suggests that companies should consider making some items of their disclosure more prominent than other items. A company should emphasize material information and de-emphasize less important information. For example, the SEC suggests that companies could improve their presentation by emphasizing in their Compensation Discussion and Analysis how and why they established compensation levels, and de-emphasizing and shortening lengthy discussions of compensation program mechanics.

    • Format

The SEC encourages methods of presentation that are tailored to a particular company’s circumstances, which can be useful to investor understanding. If a company presents an alternative summary compensation table, the company should de-emphasize the alternative table and ensure that it was not presented more prominently than the required table. To the extent that a company’s discussion or presentation of an alternative summary compensation table does not overshadow or detract from the required tables, the company should still explain differences between compensation amounts presented in those tables and compensation amounts presented in the required tables.

    • Use Plain English

It is important to recognize that disclosure can be clear and understandable yet not meaningful or responsive to disclosure requirements. Conversely, disclosure can be responsive in content, but not clear and understandable. The SEC found that a significant number of companies could improve their analyses of how and why they made certain executive compensation decisions. According to the SEC, Careful drafting consistent with plain English principles could result in a shorter, more concise and effective discussion that complies with the rules.

    • Avoid Boilerplate

The SEC suggests that a company provide a clear and concise discussion of its own facts and circumstances. Companies should replace boilerplate discussions of individual performance with more specific analysis of how the compensation committee considered and used individual performance to determine executive compensation. Companies should not repeat information from the required compensation tables, but rather provide a clear and concise analysis of the information in the required compensation tables. Companies should not cut and paste language from a compensation plan or employment agreement, but rather present the information in a clear and understandable manner.

    • Enhance Readability

Companies should be mindful of font size in their tables and related footnote presentations and to increase, where practicable, font size to enhance readability.

Compensation Discussion and Analysis

The SEC suggests that companies enhance their analyses of compensation policies and discussions by including how they determined the amounts of specific compensation elements. The SEC’s goal is to help companies enhance their discussions of how they arrived at the particular levels and forms of compensation that they chose to award to their named executive officers and why they pay that compensation, giving investors an analysis of the results of their compensation decisions.

    • Compensation philosophies and decision mechanics

The SEC asked a substantial number of companies to refocus their Compensation Discussion and Analysis presentations from a discussion of decision mechanics to a discussion on the substance of their compensation decisions and to disclose how they analyzed information and why their analyses resulted in the compensation they paid. For example, where a company provided a lengthy discussion about its compensation philosophies, the SEC suggested that it improve its Compensation Discussion and Analysis by explaining how and why those philosophies resulted in the numbers they presented in the required tables. Similarly, where a company provided a lengthy discussion about its decision-making process, the SEC suggested that, rather than explaining the process, it explain how its analysis of relevant information resulted in the decisions it made.

Companies should discuss the extent to which the amounts paid or awarded under each compensation element affected the decisions they made regarding amounts they paid or awarded under other compensation elements.

    • Performance targets

The SEC issued more comments regarding performance targets than any other disclosure topic in its review of the executive compensation and other related disclosure of the 350 companies. The SEC often found it difficult to understand how companies used these performance targets or considered qualitative individual performance to set compensation policies and make compensation decisions. The SEC is interested in having companies clearly lay out the way that qualitative inputs are ultimately translated into objective pay determinations.

Where it appeared that performance targets were material to a company’s policy and decision-making processes, companies should disclose the targets or demonstrate to the SEC that disclosure of the particular targets could cause it competitive harm. In accordance with Instruction 4 to Item 402(b), companies are required to discuss how difficult it will be for the executive or how likely it will be for the company to achieve undisclosed target levels or other factors.

While disclosure will always depend upon each company’s particular facts and circumstances, there are a number of situations where a company may find it necessary to discuss prior and current year performance targets to place its disclosure in context or affect a fair understanding of a named executive officer’s compensation. It also may be material for a company to disclose whether the company or the named executive officer achieved or failed to achieve targets in prior years. Those situations may include, for example, where a company has a multiple year compensation plan or where target levels vary materially between years. Where a company’s disclosure implied that its current or prior year targets were material to an understanding of a named executive officer’s compensation for the last fiscal year or were otherwise material in the context of that company’s Compensation Discussion and Analysis, the company should disclose prior year and current year targets.

  • Benchmarks

Companies should provide a detailed explanation of how they used comparative compensation information and how that comparison affected compensation decisions. If a company states that it benchmarked its compensation, but it retained discretion to benchmark to a different point or range, or not to benchmark at all, the company should disclose the nature and extent of that discretion and whether or how it exercised that discretion.

If a company benchmarks compensation to its peers, the company should identify the companies to which it compared itself as well as the compensation components it used in that comparison. If a company benchmarks compensation to a vague or broad range of data regarding other companies, the company should explain specifically where its compensation fell within that range.

    • Change-in-control and termination arrangements

The SEC asked a number of companies to disclose why they structured the material terms and payment provisions in their change-in-control and termination arrangements as they did. Companies should discuss how potential payments and benefits under these arrangements may have influenced their decisions regarding other compensation elements.

By Steve Kronengold and David C. Zuckerbrot. © December 2007. All rights reserved.
This article is provided for educational, informational and non-commercial purposes only. The content of this article is not intended to provide legal advice on any subject matter and should not be relied on as such.

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